2015-11-04

Fear That Credit Gurantees Will Produce A Chain Reaction

China’s credit guarantees, lauded by Premier Li Keqiang for helping fund smaller firms, are backfiring as a slowing economy risks causing a chain of defaults.
Failures of guaranteed loans surged 86 percent last year to about 400 billion yuan ($63 billion), according to UBS Group AG. At the nation’s Big Five lenders, such borrowings made up 18 percent of the total and 29 percent of non-performing financing, the Swiss bank said in a note. Standard & Poor’s said specialist guarantee firms are suffering, while the industry’s second-largest company halted operations amid accusations that it took on too much financial risk.

...“The borrowers are all exposed to the same risk, and that’s the economic slowdown," said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P. "That’s why all of a sudden this cross-guarantee practice is backfiring. A relatively well-performing company could be jeopardized just because it has to honor obligations.”

...“When the economy was strong, people didn’t take guarantees seriously -- it was more a ‘it’s just a promise,’” said Joe Zhang, former deputy head of China investment banking at UBS and author of "Inside China’s Shadow Banking: The Next Subprime Crisis." "Now that the economy has declined, these promises are biting, and biting hard.”